The new direct tax code is a bold attempt at consolidating the entire corpus of law relating to direct taxes — income tax, dividend distribution tax, fringe benefit tax, and wealth tax. Now open for public discussion, the code will be incorporated in a bill the government hopes to introduce in the winter session of Parliament. It represents a strategic shift in the government’s fiscal agenda relating to direct taxes. Its three main objectives are: to minimise t he number of tax exemptions even while maintaining moderate rates; remove ambiguities; and curb evasion. The Finance Minister hopes that the code — expected to become law by 2011 — will provide stability to the tax regime as it is based on widely accepted principles of taxation and best international practices. The proposal to reduce the tax liabilities of individuals and corporates has attracted a great deal of attention but more important is the principle that low tax rates combined with simpler tax laws and minimal exemptions will benefit both the tax payer and the exchequer. In that sense, the code’s proposal for lower marginal rates across all income slabs — for instance, total income between Rs.1.60 lakh and Rs.10 lakh will be taxed at 10 per cent — ought to be evaluated along with other rationalisation measures proposed.
The move to streamline the tax treatment on savings by applying the EET method (exempt savings, exempt interest on savings, and tax withdrawals) removes the existing anomalies, besides taxing expenditure. However, with the penetration of social security schemes being at low levels, the case for exempting retirement benefits from tax still remains strong. The trebling of the deductible savings to Rs.3 lakh is long overdue. The changes proposed in the taxation of capital gains and wealth tax ought to be welcomed although in the first instance they appear to cause hardships to some categories of assessees. The distinction between short-term and long-term capital gains is to be eliminated, and this might affect punters in the exchanges. On the other side, the abolition of the turnover tax on share transactions will increase trading volumes in the exchanges. Corporate tax rates are proposed to be brought down to 25 per cent. The move to introduce a minimum alternate tax on assets requires clarification as even loss-making companies might be dragged into it. One major area of concern is the extraordinary powers proposed to be given to the tax authorities who can, in extreme situations, bypass even tax treaties. In its entirety, the tax code is a major step forward and ought to be welcomed.
